Carbon Streaming Corporation (OFSTF): Invest in Voluntary Carbon Credits

Carbon credit prices are going up, but there are few options for individual investors to participate. Though funds like KRBN and GRN let you invest in carbon credits in regulated markets like the EU, there are no options for voluntary carbon offsets. Carbon Streaming Corp wants to change that by bringing the streaming model to voluntary carbon credits.

SustainFi September 9, 2021

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What is Carbon Streaming Corp?

Carbon Streaming Corp (OTCMKTS: OFSTF) is a listed company that invests in voluntary carbon credits. Based in Toronto, Canada, Carbon Streaming Corporation (CSC) went public on the Canadian NEO Exchange in July 2021 with the ticker NETZ. It is currently available to U.S. investors under the ticker OFSTF, and management plans to list on the NASDAQ by the end of 2021.

If you are an individual investor and not a hedge fund, it is very hard to invest in carbon credits. In particular, there are no options to invest in voluntary carbon credits (unless you are buying them to cancel your own emissions.)

Carbon Streaming Corp invests in voluntary carbon offset projects like reforestation. They give cash to the projects upfront to fund their development needs. In return, CSC gets a stream of royalty payments that can go on for twenty or thirty years.

Assuming that carbon offset prices continue to rise, CSC can sell them at a profit. At the same time, they are helping fund eco-friendly, carbon-reducing projects. So this could be a profitable investment with a feel-good factor.

CSC was founded by a group of mining industry experts who previously implemented the streaming model in the mining space. (The streaming model was popular in the gold mining industry.)

What are carbon credits?

A carbon credit is a permit or a certificate to emit one ton of carbon dioxide or CO2. (An average American emits between 16 and 20 tons of CO2 each year through heating, cooling, driving, flying, and other activities. An average car emits around 4.6 tons of CO2 annually.)

Carbon credits can be regulatory or voluntary.

Regulatory or compliance carbon credit markets

In regulated markets, governments give polluting companies like power plants “licenses to pollute.” Each carbon credit equals one ton of greenhouse gas emissions.

The amount of credits declines over time, and companies must invest in cleaner technologies or pay up for pricier credits. Those that don’t comply are fined.

Regulatory carbon markets have already been implemented in the EU, China, and California. According to data provider Refinitiv, the compliance markets were worth $261 billion in 2020.

Voluntary carbon offset markets

Some companies and individuals choose to offset their emissions without any government imperative. Unsurprisingly, the size of the voluntary carbon market is much smaller, around $320 million.

Voluntary markets are driven by companies like Microsoft that have made net-zero pledges. Over 1,500 companies announced net-zero targets in 2020. Some have even promised to offset more carbon than they had emitted. Because it’s impossible to run a business that doesn’t emit carbon, these companies must buy carbon offsets.

Carbon offsets are generated by projects that capture carbon from the atmosphere. For example, offset projects can preserve forests or capture methane, a potent greenhouse gas, from landfills.

Voluntary carbon offsets are also becoming popular with individuals. Delta and American Airlines let you offset carbon emissions from flights, and companies like Wren, Cool Effect, Climeworks or Terrapass let you offset most of your everyday emissions.

Are carbon credits an attractive investment?

Carbon credits help fight climate change. But they may also be an attractive investment opportunity. In fact, carbon credits in both regulated and voluntary markets have been going up in price.

The price of European carbon credits is up 83.5% in 2021 to date

Source: ICE

In regulated markets, governments are reducing the supply of carbon credits each year to get companies to pollute less. The European Union, California, and China have all promised to become carbon-neutral. Carbon credits are a big component of getting there.

In voluntary markets, demand from companies like Microsoft and Amazon is driving offset prices higher too.

How does Carbon Streaming Corp invest?

Carbon Streaming Corp wants to bring the streaming model, historically used in energy and mining, to carbon credits. With this model, CSC gives money to an offset project upfront and receives a fixed percentage of the project’s carbon credits. 

In addition to funding projects directly, CSC may invest in compliance and voluntary credit markets. However, their focus is on streaming. 

Source: Carbon Streaming Corporation

With streaming, CSC gets economic exposure to the carbon project without having to operate. Instead, CSC does diligence on the projects and the developers, hiring third-party consultants and visiting the sites. Picking good operators is key: if the operator is low-quality, the project may not generate positive returns.

To date, Carbon Streaming closed two streaming deals for over $30 million, and the third deal is in the works.

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MarVivo Blue Carbon Conservation Project

The first streaming deal is with the MarVivo Blue Carbon Conservation Project in Baja California Sur, Mexico. It’s a mangrove forest and marine habitat conservation project to be developed in line with the UN’s REDD+ standard. (Mangrove trees are mega carbon-absorbers, storing five times as much carbon as tropical forests.)

CSC has invested $6 million in the project. In return, they will receive the greater of 200,000 credits and 20% of the annual production under a 30-year agreement. 40% of revenue from the sale of carbon credits will go back to MarVivo’s project developers. CSC expects that MarVivo will start generating carbon credits in the first half of 2023.

Infinite EARTH Rimba Raya Biodiversity Reserve Project

Carbon Streaming Corp has signed its second carbon streaming agreement with Infinite EARTH, the developer of the Rimba Raya Biodiversity Reserve Project in the Indonesian Borneo. The project is expected to generate 70 million credits over 20 years. It has already been operational for over a decade, absorbing 3.5 million tons of carbon each year. CSC has invested $26.3 million into Rimba Raya.

Future Projects

Finally, CSC has signed a term sheet for another project, the Bonobo Peace Forest in the Democratic Republic of Congo. The project seeks to preserve bonobos and their rainforest habitat. It has the potential to remove hundreds of million tonnes of CO2 over 30 years.

Looking into the future, CSC believes that they have a deal pipeline of over $575 million, including a near-term pipeline of $165 million. They are looking for returns of 15% and better.

Source: Carbon Streaming Corporation

Risks

Investing in Carbon Streaming Corp is highly speculative, and the stock is hard to value. Although the company raised $104 million (of which it invested $32 million so far), its market capitalization is nearly $200 million.

To invest, you need to believe that the management team can find over $100 million of high-return projects in a “hot” market for carbon offsets. Yet, the total size of the market for voluntary offsets is only $320 million. The regulated market is much larger, but CSC is specifically targeting voluntary offsets.

Unproven track record and deal pipeline 

Although the management team has decades of mining industry experience, they have not invested in carbon credits before. Carbon streaming projects are operated by third-party developers, and the team needs to know how to pick the good ones.

Further, to justify its valuation, CSC must find enough attractive carbon offset projects. The company is competing with well-funded corporate players for offsets. So far, CSC has only invested $32 million.

Carbon prices need to hold up

CSC is relying on carbon prices to stay high and go up. The Rimbo Raya project is struck at a price of $8.5 per ton for the first four years, which is higher than voluntary offset futures today.

CSC is making investments upfront, but projects will generate revenues for many years. The first project, MarVivo, will only start delivering credits in the first half of 2023. And timelines can slip.

Low market capitalization

The company went public in the summer of 2021 and has a market capitalization of less than $200 million.

Geopolitical risk

CSC has invested in projects in geopolitically unstable places like the Democratic Republic of Congo.


🔔 If you want to invest in the climate transition, explore carbon credit funds like KRBN and GRN.

NO INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.